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Abstract

Of the three dimensions of investing—return, risk, and cost—investors have direct control only over cost. The subject here is five common assumptions about fees, which are a major component of costs. Three of the myths about fees concern appropriate fee level and structure, fixed versus incentive, and the value of high water marks; two others concern fees in particular contexts. Do hedge funds deserve their high fees, and can investors always separate alpha from beta, and pay appropriately for each? Fees should not be an overriding investor concern. High-fee products are worthwhile if they deliver sufficiently high returns and low risk, and some high return products have fees that make them poor investments. Investors must analyze fees in the overall context of return, risk, and cost.